In cases involving publicly traded securities and purchases or sales in public securities markets, the basic elements of a private federal securities fraud action include: (1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as transaction causation; (5) economic loss, 15 U.S.C.S. § 78u-4(b)(4); and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss.
Purchasers of stock in a corporation sued the corporation and its corporate officials, alleging that a misrepresentation by the corporation caused the stock price to be artificially inflated. Purchasers also alleged that the corporation falsely stated that the corporation's pharmaceutical spray device would receive federal approval. The U.S. Court of Appeals for the Ninth Circuit held that the purchasers sufficiently pleaded loss causation. The corporation appealed to the Supreme Court of the United States.
Was the evidence sufficient to establish loss causation?
The U.S. Supreme Court held that the purchasers' allegation that the price of the stock on the date of purchase was inflated because of the misrepresentation was insufficient by itself to establish the loss causation required by § 78u-4(b)(4). At the time of purchase, the purchasers suffered no loss since at that instant the stock price was in fact the value of the stock, and it was not necessarily true that any subsequent decline in the value of the stock was caused by the artificially inflated price rather than other factors. Further, the purchasers' complaint nowhere provided petitioners with notice of what the relevant economic loss might have been or of what the causal connection was between that loss and the misrepresentation concerning the spray device.